NEW YORK (Fortune) -
The $5 billion hedge fund Millennium Partners, led by storied investor Israel A. Englander, reached a $180 million settlement Thursday with New York Attorney General Eliot Spitzer and the Securities & Exchange Commission to settle charges of elaborate mutual fund trading fraud.

Millennium is the first hedge fund to reach an agreement with regulators regarding mutual fund timing since Canary Capital Partners in 2003.

All of that $180 million will go toward restitution for the mutual fund shareholders, according to a press release issued by the attorney general's office.

"Millennium developed multiple schemes that cost mutual fund investors tens of millions of dollars," Spitzer said. "Restitution will be made to investors who were harmed." Millennium declined comment.

Fortune first revealed the details of Millennium's schemes in its November 14 story, "Damaged Goods," about Englander, a 57-year old billionaire, and his gargantuan fund. Millennium has netted investors—including pensions and charities--an average of 17 percent a year since it started in 1989.

But the complaint against Millennium -- which was announced along with today's settlement -- certainly brings some of those gains into question.

Shell companies and phony addresses

Spitzer's office alleges that between 1999 and 2003 the hedge fund used a scheme dubbed "flying under the radar" to open up numerous accounts at mutual funds and employ improper market timing and late trading strategies. (Late-trading is illegal; market timing is frowned upon by mutual fund companies because it hurts ordinary shareholders by diluting the value of their shares.)

The trading netted profits in excess $100 million.

To execute its scheme, Millennium created over 100 shell companies and opened some 1,000 accounts at 39 different brokerages or clearing operations, and used phony addresses to prevent the mutual funds from tracing the trades to Millennium.

Also according to the complaint:

Millennium used fake "family trusts" to illegally trade mutual funds.

Some were named after employees, like the Andres Pillai Family Trust, named in part for a Millennium trader who was involved in the scheme.

Englander was listed as a principal of one trust. Millennium's chief operating officer Terence W. Feeney and general counsel Fred M. Stone were listed on other trusts.

As Fortune reported earlier, employees at the hedge fund also purchased variable annuity life insurance policies that gave Millennium access to mutual funds through sub-accounts. That way, the hedge fund could camouflage its trading.

The variable annuities had premiums as high as $35 million. Employees who purchased the insurance products had to be examined by a doctor and pass a physical.

Englander rewarded them for their trouble with dinner for themselves and "a spouse or significant other," according to the complaint.

Millennium Partners will pay $121.4 million as part of the settlement. Englander himself will pay $30 million in civil penalties and two management companies owned by Englander will pay a total of $26.6 million.

Feeney, Stone and a trader will also pay penalties and receive regulatory sanctions. According to the SEC, Millennium has neither admitted nor denied the allegations.

Traders gone wild

Some in the hedge fund community are wondering why Englander wasn't charged with a failure to supervise his traders.

Millennium, which employs upwards of 100 traders who incorporate a dizzying array of strategies, is known for its cowboy-like techniques on Wall Street.

According to Spitzer's complaint, a key Millennium investor who spoke with Englander after one of Englander's traders, Steven B. Markovitz, was convicted of securities fraud in 2003, noted that Englander more or less admitted he was "likely guilty of failing to supervise" his traders.

The SEC declined to comment, and Spitzer's office says that this settlement supersedes any individual charges.

In any case, Englander, Feeney and Stone have been barred from serving as officers or employees of an investment advisor or acting as an underwriter of a registered investment company for three years.

But that probably won't matter much to Englander, since hedge funds are largely unregulated anyway.

Industry sources say Millennium is not registering with the SEC, although many hedge funds are now doing so.

But according to the settlement, in order to keep operating Millennium must create new chief legal and compliance officer positions and retain an independent consultant as well as an oversight committee to manage legal, compliance and ethics issues.

Astronomical fees

Separately, Fortune has learned that Millennium's management fee is far higher than the 4 percent (a high number in and of itself) Fortune originally reported.

Millennium traders say the hedge fund passes on all expenses to investors, and that the fee can be as high as 10 percent or more a year. According to experts, Millennium likely has the highest fees in the industry.

Investors also pay a standard 20 percent fee on the fund's annual gains. Insiders say Englander's annual salary includes around 4 percent of the total fees paid by investors. Last year he made $205 million, according to Institutional Investor.

Given those resources, "The $30 million he has to cough up won't make much of a dent in Izzy's net worth," says an ex-Millennium trader.